Japan’s Economy and the Three Arrows: On Target?

In this week’s Economic Commentary, we discussed the importance of the concept of “three arrows” in the economic policies of Japan’s Prime Minister Shinzo Abe. Definitely check out the full piece, but here’s a quick summary. In the 1500s, as the legend has it, a Japanese nobleman named Mori Motonari wanted to demonstrate to his three sons the strength that they had together, but lacked individually. He gave each son an arrow and told them to break it. Very easily, each son snapped the arrow. Then he gave each son three arrows and told them to break the bundle at once. They couldn’t because three arrows were too strong.

Mori-san hailed from the same prefecture that Prime Minister Abe comes from, so it’s fitting that Abe picked up the idea of three arrows when spelling out his economic policies meant to lift Japan from decades of deflation and economic stagnation. Abe’s three arrows are 1)easy monetary policy, 2)increased government spending, and 3)increased efficiency through economic reform.

In my research, I came across another idea that might apply to the current situation…and also happens to deal with Japanese archery. Kyûdô is Japanese archery, practiced with an asymmetrical longbow and tracing its roots back some 2,000 years. Traditionally, there are three levels of skill associated with practitioners of kyûdô:

tôteki – This level is about mechanical proficiency. The arrow strikes the target.

kanteki – More forceful than mere proficiency. The arrow pierces the target with intensity.

zaiteki – The highest level and the ultimate goal of kyûdô. Shooting so expert that it is as if the arrow exists in the target, even before shooting. Zaiteki conveys a sense of profound skill such that the outcome is certain.

So, if we apply the scale of kyûdô proficiency to Abe’s three arrows, where do you suppose he’ll rank? Recent economic reports in Japan have been almost stellar, with more good news in early June. The services PMI rebounded in May to a robust 54.8, a new high for the cycle. The manufacturing PMI edged up to 51.5 with solid details. The composite survey jumped to a five-year high of 54.1. All of these suggest healthy growth for the second quarter of 2013. A gauge of private consumption moved up in April to a level 1.5% annualized versus the first quarter average. Employment is increasing at the best pace since 2008, 0.64% over the prior year. With two decades of economic malaise as the prologue to all of this news, it would augur for more than just mere proficiency (tôteki). The speed and effectiveness with which Abe’s policies have come on line and proven effective would seem to suggest kanteki. We can rule out a zaiteki level of proficiency – even the Fed (arguably the most effective of the world’s major central banks) hasn’t come close to monetary policy that breeds that kind of certainty.

Clouding the picture though are the declines in the Nikkei 225 Index, which has lost around 17% in recent weeks. Pushing it lower was the belief that Abe’s three arrows were too little, too late. Abe’s speech describing the plan was vague, with goals set far in the future. Maybe we’re back to tôteki? There is an Upper House election in July, which may be the reason Abe is delaying some of the finer points. Abe’s Liberal Democratic party controls the Parliament’s lower house, and a convincing win in the Upper House could be what Abe is waiting for to unveil his real reform.

Abe’s final measure of proficiency will depend on the next several months. But for an economy that has not been effective at fighting deflation for over twenty years, maybe tôteki will be good enough.

Be sure to read more about Japan (as well as thoughts on frontier markets, China’s 7% growth rate, and an uptick in the Eurozone) in the most recent economic commentary.

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